The internal auditors play a very significant role in maintaining accounting ethics; however, it is also appropriate to assert that the working of the internal auditor is being controlled by the management of the organization. The external auditors remain helpless due to manipulative data shown by the authorities. Henceforth, the managements continue to groom their tactics towards unethical practices without being detected on the surface. Hence, the internal or external auditors may not be enough to identify the emerging frauds in the corporate world such as white-collar crimes which may occur in the form of corporate scams, cash embezzlement, insolvencies, corporate disputes, and possibly unethical financial transaction. This study has discussed the applicability of forensic auditing over external auditing using past Indian scenarios for the fraud detection as well as prevention. The chapter is conceptual and focuses on the magnitude of forensic auditing in the detection as well as prevention of frauds in the business enterprise.
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Forensic auditing is the type of auditing that scrutinizes financial information and uses specific auditing abilities to assemble evidence for potential crimes related to financial scams. It is the combination of accounting, auditing and investigative measure that uses legal procedures to determine whether the conduct of the company or person is legal or not and presents evidence to the court (Chakarbarti, 2014). Corporate fraud, employee larceny, and other corporate financial wrongdoings are getting momentum, therefore there is need to ensure that auditing personnel and auditing experts must have required skills and appropriate trainings to detect such frauds in advance both at internal level and state level. This practice will help the nation in preventing frauds or embezzlements, prevent national level scams and detection of malpractices prevailing in the corporate and public sector (Bhasin, 2007). The requirements of forensic auditing in addition to internal and external auditing practices can be understood with revisiting the scam history of India, the first and popular name came is Harshad Mehta scam, which was worth of Rs 4000 crores that shaken the stock market in 1992. Harshad Mehta was popularly known as Big Bull as name given by traders to Mr. Harshad Mehta, was involved in massive stock manipulation schemes. The scam was exposed by one of the forensic auditors appointed by the court (Hassan, 2012). The shocking case of Satyam computers in 2009 still holds the most glorying scam in the history of India with the loss amount of Rs 8000 crore, Where Satyam’s Management had falsified the companies accounts and by inflating profit in books. SEBI in its report also stated that Companies Auditors failed to detect the fraud even after conducting multiple audits before the case was forwarded to forensic accountants. The investigation took more than five years to investigate the case, which led to signify the importance of forensic auditing as the profession in India (Basin, 2013). The concept of Forensic auditing is the consort of accounting, performing audits, and investigating expertise to assist in legal issues in detection of frauds (Gray, 2008). Two major essentials of the forensic auditing include the Litigation services that predefine the role of accountant and identify as the expert for their consultancy services and further use their services that require forensic auditing skill to order to provide testimony in the court room as a requirement in certain fraud detection cases (Singh, 2012). Simplifying the statement, in term of Litigation, the word forensic means to be appropriate to be used in the court of law. As per the definition given by Association of Institute of Certified Public Accountants (AICPA’s), one of the prestige and well known accounting body, Forensic auditing services involves set of specialized knowledge along with the investigative assistances that are especially possessed by CPAs involving collection, analyzing and evaluating the essential evidences into the specific matters that may lead to financial fraud and communication the same to the court room, boardroom or other legal venue for the purpose of initiating legal action. The collection and analysis of the evidence may require the use of various quantitative techniques (AICPA, 2002). Forensic accounts dwell the hugger-mugger of the auditing system. Their job is to respond at a moment when their clients witness trouble with the possibility of fraudulent activity. Fraud incorporates all the miscellaneous means due to human inventiveness to get an undue advantage over another by overlooking the truth (Nayyar, V., & Batra, R. (2020). It includes all the medium like unethical illusion, clever elements, dithering and any other biased way by which another is duped (Well, 2003). The converge of this paper is to witness the significance of forensic auditing for the detection and prevention of white-collar crimes, where the techniques of external auditing don’t work in an effective manner. White-collar criminals are experts, who can take vantage of their situations to attain monetary gain at any cost (E.I. Okoye, 2013).